A National Tragedy: How The Income Tax System Really Works

This article continues an every-four-year -- before the presidential election -- tradition. Actually, this article first appeared in this column in October 2003. Every time this article was published, I was flooded with requests for copies. In its own way, what you are about to read has been viral for almost a decade. You'll love what follows. Enjoy!

Then pass it on to your friends. Save copies to give to your kids and grand-kids.

I did not write it; wish I had. The source is T. Davies, professor of accounting at the University of South Dakota School of Business, who told me he got if from a student. So, the real author remains unknown. Okay, here's the article:

"Let's put [income] tax cuts in terms everyone can understand. Suppose that every day, 10 men go out for dinner. The bill for all 10 comes to $100. If they paid their bill the way we pay our taxes, it would go something like this.

"The first four men -- the poorest -- would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eight $12, the nine $18, and the 10th man -- the richest -- would pay $59. That's what they decided to do. The 10 men ate dinner in at the restaurant every day and seemed quite happy with the arrangement -- until one day the owner threw them a curve (in tax language, a tax cut).

"'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily meal by $20.' So now dinner for the 10 only costs $80.

"The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his 'fair share'? The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being paid to eat their meals.

"So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so the fifth man now paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the 10th man [the wealthy diner] with a bill of $52 instead of his earlier $59. Each of the six was better off than before. And the first four continued to eat for free.

"But once outside the restaurant, the men began to compare their savings. 'I only got a dollar out of the $20!' declared the sixth man, pointing to the 10th. 'But he [the wealthy guy] got $7!'

"'Yeah, that's right!' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got seven times more than me!' 'That's true!' shouted the seventh man, 'Why should he get $7 back when I got only $2? The wealthy get all the breaks!'

"'Wait a minute!' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'
"The nine men surrounded the 10th and beat him up. [Like some of our elected officials in Washington want to beat up the wealthy with higher taxes]. The next night he didn't show up for dinner (or, in the real world, he took his business out of the country), so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late, what was very important. They were $52 short of paying the bill! Imagine that!

"And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!"

That ends the article. Now, I have a favor to ask of you: Please send a copy of this article to every politician you know who could influence income-tax legislation. Make sure you include both presidential candidates.

The sad part is that we -- professional tax practitioners -- have not figured out how to beat the income tax. Earn and you pay; earn more and you pay more.

But happily, we do know how to beat the estate tax -- legally. Okay, you wealthy taxpayers... join in the estate tax saving fun. To learn how, visit taxsecretsofthewealthy.com.

IRVING L. BLACKMAN has been practicing accounting and law more than 50 years, specializing in wealth transfer, business succession and valuation. He was a founding partner of Blackman Kllick Bartelstein LLP, CPAs, one of the largest accounting firms in the country, and is a member of the Illinois Society of CPAs, American Institute of CPAs and the American Speakers Association, among other organizations. Blackman has authored 21 books on taxation and penned hundreds of articles for trade publications. His company, Tax Secrets of the Wealthy, is headquartered in Naples, FL. He may be contacted at (847) 674-5295 or Irv@IrvBlackman.com.